Rule2022-23982
Consumer Financial Protection Circular 2022-06: Unanticipated Overdraft Fee Assessment Practices
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 7, 2022
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (Bureau or CFPB) has issued Consumer Financial Protection Circular 2022-06, titled, "Unanticipated Overdraft Fee Assessment Practices." In this Circular, the Bureau responds to the question, "Can the assessment of overdraft fees constitute an unfair act or practice under the Consumer Financial Protection Act (CFPA), even if the entity complies with the Truth in Lending Act (TILA) and Regulation Z, and the Electronic Fund Transfer Act (EFTA) and Regulation E?"
Full Text
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<title>Federal Register, Volume 87 Issue 214 (Monday, November 7, 2022)</title>
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[Federal Register Volume 87, Number 214 (Monday, November 7, 2022)]
[Rules and Regulations]
[Pages 66935-66940]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-23982]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Chapter X
Consumer Financial Protection Circular 2022-06: Unanticipated
Overdraft Fee Assessment Practices
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Consumer financial protection circular.
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SUMMARY: The Consumer Financial Protection Bureau (Bureau or CFPB) has
issued Consumer Financial Protection Circular 2022-06, titled,
``Unanticipated Overdraft Fee Assessment Practices.'' In this Circular,
the Bureau responds to the question, ``Can the assessment of overdraft
fees constitute an unfair act or practice under the Consumer Financial
Protection Act (CFPA), even if the entity complies with the Truth in
Lending Act (TILA) and Regulation Z, and the Electronic Fund Transfer
Act (EFTA) and Regulation E?''
DATES: The Bureau released this Circular on its website on October 26,
2022.
ADDRESSES: Enforcers, and the broader public, can provide feedback and
comments to <a href="/cdn-cgi/l/email-protection#9bd8f2e9f8eef7fae9e8dbf8fdebf9b5fcf4ed"><span class="__cf_email__" data-cfemail="77341e0514021b160504371411071559101801">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT: Sonya Pass, Senior Legal Counsel,
Legal Division, at 202-435-7700. If you require this document in an
alternative electronic format, please contact
<a href="/cdn-cgi/l/email-protection#fbb8bdabb9a4ba98989e888892999297928f82bb989d8b99d59c948d"><span class="__cf_email__" data-cfemail="4605001604190725252335352f242f2a2f323f062520362468212930">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Question Presented
Can the assessment of overdraft fees constitute an unfair act or
practice under the Consumer Financial Protection Act (CFPA), even if
the entity complies with the Truth in Lending Act (TILA) and Regulation
Z, and the Electronic Fund Transfer Act (EFTA) and Regulation E?
Response
Yes. Overdraft fee practices must comply with TILA, EFTA,
Regulation Z, Regulation E, and the prohibition against unfair,
deceptive, and abusive acts or practices in section 1036 of the
CFPA.\1\ In particular, overdraft fees assessed by financial
institutions on transactions that a consumer would not reasonably
anticipate are likely unfair. These unanticipated overdraft fees are
likely to impose substantial injury on consumers that they cannot
reasonably avoid and that is not outweighed by countervailing benefits
to consumers or competition.
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\1\ CFPA section 1036, 12 U.S.C. 5536.
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As detailed in this Circular, unanticipated overdraft fees may
arise in a variety of circumstances. For example, financial
institutions risk charging overdraft fees that consumers would not
reasonably anticipate when the transaction incurs a fee even though the
account had a sufficient available balance at the time the financial
institution authorized the payment (sometimes referred to as
``authorize positive, settle negative (APSN)'').
Background
An overdraft occurs when consumers have insufficient funds in their
account to cover a transaction, but the financial institution
nevertheless pays it. Unlike non-sufficient funds penalties, where a
financial institution incurs no credit risk when it returns a
transaction unpaid for insufficient funds, clearing an overdraft
transaction is extending a loan that can create credit risk for the
financial institution. Most financial institutions today charge a flat
per-transaction fee, which can be as high as $36, for overdraft
transactions, regardless of the amount of credit risk, if any, that
they take.
Overdraft programs started as courtesy programs under which
financial institutions would decide on a manual, ad hoc basis to pay
particular check transactions for which consumers lacked funds in their
deposit accounts rather than to return the transactions unpaid, which
may have other negative consequences for consumers. Although Congress
did not exempt overdraft programs offered in connection with deposit
accounts when it enacted TILA,\2\ the Federal Reserve Board (Board) in
issuing Regulation Z in 1969 created a limited exemption from the new
regulation for financial institutions' overdraft programs at that time
(also then commonly known as ``bounce protection programs'').\3\
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\2\ Public Law 90-321, 82 Stat. 146 (May 29, 1968), codified as
amended at 15 U.S.C. 1601 et seq.
\3\ 34 FR 2002 (Feb. 11, 1969). See also, e.g., 12 CFR
1026.4(c)(3) (excluding charges imposed by a financial institution
for paying items that overdraw an account from the definition of
``finance charge,'' unless the payment of such items and the
imposition of the charge were previously agreed upon in writing); 12
CFR 1026.4(b)(2) (providing that any charge imposed on a checking or
other transaction account is an example of a finance charge only to
the extent that the charge exceeds the charge for a similar account
without a credit feature).
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Overdraft programs in the 1990s began to evolve away from this
historical model in a number of ways. One major industry change was a
shift away from manual ad hoc decision-making by financial institution
employees to a system involving heavy reliance on automated programs to
process transactions and to make overdraft decisions. A second was to
impose higher overdraft fees. In addition, broader changes in payment
transaction types increased the impacts of these other changes on
overdraft programs. In particular, debit card use expanded
dramatically, and financial institutions began charging overdraft
[[Page 66936]]
fees on debit card transactions, which, unlike checks, are authorized
by financial institutions at the time consumers initiate the
transactions. And unlike checks, there are no similar potential
negative consequences to consumers from a financial institution's
decision to decline to authorize a debit card transaction.
As a result of these operational changes, overdraft programs became
a significant source of revenue for banks and credit unions as the
volume of transactions involving checking accounts increased due
primarily to the growth of debit cards.\4\ Before debit card use grew,
overdraft fees on check transactions formed a greater portion of
deposit account overdrafts. Debit card transactions presented consumers
with markedly more chances to incur an overdraft fee when making a
purchase because of increased acceptance and use of debit cards for
relatively small transactions (e.g., fast food and grocery stores).\5\
Over time, revenue from overdraft increased and began to influence
significantly the overall pricing structure for many deposit accounts,
as providers began relying heavily on back-end pricing while
eliminating or reducing front-end pricing (i.e., ``free'' checking
accounts with no monthly fees).\6\
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\4\ CFPB, Study of Overdraft Programs: A White Paper of Initial
Data Findings, at 16 (June 2013), available at <a href="https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf">https://files.consumerfinance.gov/f/201306_cfpb_whitepaper_overdraft-practices.pdf</a>.
\5\ Id. at 11-12.
\6\ Id. at 16-17.
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As a result of the rapid growth in overdraft programs, Federal
banking regulators expressed increasing concern about consumer
protection issues and began a series of issuances and rulemakings. In
the late 2000s as the risk of significant harm regarding overdraft
programs continued to mount despite the increase in regulatory
activity, Federal agencies began exploring various additional measures
with regard to overdraft, including whether to require that consumers
affirmatively opt in before being charged for overdraft programs. In
February 2005, the Board, the Federal Deposit Insurance Corporation
(FDIC), the National Credit Union Administration (NCUA), and the Office
of the Comptroller of the Currency (OCC) issued Joint Guidance on
Overdraft Protection Programs.\7\ In May 2005, the Board amended its
Regulation DD (which implements the Truth in Savings Act) to expand
disclosure requirements and revise periodic statement requirements for
institutions that advertise their overdraft programs to provide
aggregate totals for overdraft fees and for returned item fees for the
periodic statement period and the year to date.\8\ In May 2008, the
Board along with the NCUA and the now-defunct Office of Thrift
Supervision proposed to exercise their authority to prohibit unfair or
deceptive acts or practices under section 5 of the Federal Trade
Commission Act (FTC Act) \9\ to prohibit institutions from assessing
any fees on a consumer's account in connection with an overdraft
program, unless the consumer was given notice and the right to opt out
of the service, and the consumer did not opt out.\10\ In January 2009,
the Board finalized a Regulation DD rule that, among other things,
expanded the previously mentioned disclosure and periodic statement
requirements for overdraft programs to all depository institutions (not
just those that advertise the programs).\11\ In addition, although the
three agencies did not finalize their FTC Act proposal, the Board
ultimately adopted an opt-in requirement for overdraft fees assessed on
ATM and one-time debit card transactions under Regulation E (which
implements EFTA) \12\ in late 2009.\13\
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\7\ 70 FR 9127 (Feb. 24, 2005).
\8\ 70 FR 29582 (May 24, 2005).
\9\ 15 U.S.C. 45.
\10\ 73 FR 28904 (May 19, 2008).
\11\ 74 FR 5584 (Jan. 29, 2009). The rule also addressed balance
disclosures that institutions provide to consumers through automated
systems.
\12\ Public Law 90-321, 92 Stat. 3728 (Nov. 10, 1978), codified
as amended at 15 U.S.C. 1693 et seq.
\13\ 74 FR 59033 (Nov. 17, 2009).
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More recently, Federal financial regulators, such as the CFPB, the
Board, and the FDIC, issued guidance around practices that lead to the
assessment of overdraft fees. In 2010, the FDIC issued Final Overdraft
Payment Supervisory Guidance on automated overdraft payment programs
and warned about product over-use that may harm consumers.\14\ In 2015,
the CFPB issued public guidance explaining that one or more
institutions had acted unfairly and deceptively when they charged
certain overdraft fees.\15\ Beginning in 2016, the Board publicly
discussed issues with unfair fees related to transactions that
authorize positive and settle negative.\16\ In July 2018, the Board
issued a Consumer Compliance Supervision Bulletin finding certain
overdraft fees assessed based on the account's available balance to be
an unfair practice in violation of section 5 of the FTC Act.\17\ In
June 2019, the FDIC issued its Consumer Compliance Supervisory
Highlights and raised risks regarding certain use of the available
balance method.\18\ In September 2022, the CFPB found that a financial
institution had engaged in unfair and abusive conduct when it charged
APSN fees.
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\14\ FDIC, Final Overdraft Payment Supervisory Guidance, FIL-81-
2010 (Nov. 24, 2010), available at <a href="https://www.fdic.gov/news/financial-institution-letters/2010/fil10081.pdf">https://www.fdic.gov/news/financial-institution-letters/2010/fil10081.pdf</a>.
\15\ CFPB Supervisory Highlights, Winter 2015, at 8-9, available
at <a href="https://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf">https://files.consumerfinance.gov/f/201503_cfpb_supervisory-highlights-winter-2015.pdf</a>.
\16\ Interagency Overdraft Services Consumer Compliance
Discussion (Nov. 9, 2016), available at <a href="https://www.consumercomplianceoutlook.org/outlook-live/2016/interagency-overdraft-services-consumer-compliance-discussion/">https://www.consumercomplianceoutlook.org/outlook-live/2016/interagency-overdraft-services-consumer-compliance-discussion/</a> (follow
``Presentation Slides'' hyperlink), at slides 20-21.
\17\ See Federal Reserve Board, Consumer Compliance Supervision
Bulletin 12 (July 2018), available at <a href="https://www.federalreserve.gov/publications/files/201807-consumer-compliance-supervision-bulletin.pdf">https://www.federalreserve.gov/publications/files/201807-consumer-compliance-supervision-bulletin.pdf</a> (stating that it had identified
``a UDAP violation . . . when a bank imposed overdraft fees on
[point-of-sale] transactions based on insufficient funds in the
account's available balance at the time of posting, even though the
bank had previously authorized the transaction based on sufficient
funds in the account's available balance when the consumer entered
into the transaction'').
\18\ FDIC, Consumer Compliance Supervisory Highlights 2-3 (June
2019), available at <a href="https://www.fdic.gov/regulations/examinations/consumercomplsupervisoryhighlights.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery">https://www.fdic.gov/regulations/examinations/consumercomplsupervisoryhighlights.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery</a>. The agency referred to the available
balance method as assessing overdraft fees based on the consumer's
``available balance'' rather than the consumer's ``ledger balance.''
The agency stated that use of the available balance method ``creates
the possibility of an institution assessing overdraft fees in
connection with transactions that did not overdraw the consumer's
account,'' and that entities could mitigate risk ``[w]hen using an
available balance method, [by] ensuring that any transaction
authorized against a positive available balance does not incur an
overdraft fee, even if the transaction later settles against a
negative available balance.''
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Analysis
Violations of the Consumer Financial Protection Act
The CFPA prohibits conduct that constitutes an unfair act or
practice. An act or practice is unfair when: (1) It causes or is likely
to cause substantial injury to consumers that is not reasonably
avoidable by consumers; and (2) The injury is not outweighed by
countervailing benefits to consumers or to competition.\19\
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\19\ CFPA sections 1031, 1036, 12 U.S.C. 5531, 5536.
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An unanticipated overdraft fee occurs when financial institutions
assess overdraft fees on transactions that a consumer would not
reasonably expect would give rise to such fees. The CFPB has observed
that in many circumstances, financial institutions have created serious
obstacles to consumers making informed decisions about their use of
overdraft services. Overdraft practices are complex--and differ among
institutions. Even if a consumer closely monitors their
[[Page 66937]]
account balances and carefully calibrates their spending in accordance
with the balances shown, they can easily incur an overdraft fee they
could not reasonably anticipate because financial institutions use
processes that are unintelligible for many consumers and that consumers
cannot control. Though financial institutions may provide disclosures
related to their transaction processing and overdraft assessment
policies, these processes are extraordinarily complex, and evidence
strongly suggests that, despite such disclosures, consumers face
significant uncertainty about when transactions will be posted to their
account and whether or not they will incur overdraft fees.\20\
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\20\ See, e.g., CFPB, Consumer voices on overdraft programs
(Nov. 2017), available at <a href="https://files.consumerfinance.gov/f/documents/cfpb_consumer-voices-on-overdraft-programs_report_112017.pdf">https://files.consumerfinance.gov/f/documents/cfpb_consumer-voices-on-overdraft-programs_report_112017.pdf</a>.
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For example, even when the available balance on a consumer's
account--that is, the balance that, at the time the consumer initiates
the transaction, would be displayed as available to the consumer--is
sufficient to cover a debit card transaction at the time the consumer
initiates it, the balance on the account may not be sufficient to cover
it at the time the debit settles. The account balance that is not
reduced by any holds from pending transactions is often referred to as
the ledger balance. The available balance is generally the ledger
balance plus any deposits that have not yet cleared but are made
available, less any pending (i.e., authorized but not yet settled)
debits. Since consumers can easily access their available balance via
mobile application, online, at an ATM, or by phone, they reasonably may
not expect to incur an overdraft fee on a debit card transaction when
their balance showed there were sufficient available funds in the
account to pay the transaction at the time they initiated it. Such
transactions, which industry commonly calls ``authorize positive,
settle negative'' or APSN transactions, thus can give rise to
unanticipated overdraft fees.
This Circular highlights potentially unlawful patterns of financial
institution practices regarding unanticipated overdraft fees and
provides some examples of practices that might trigger liability under
the CFPA. This list of examples is illustrative and not exhaustive.\21\
Enforcers should closely scrutinize whether and when charging overdraft
fees may contravene Federal consumer financial law. A ``substantial
injury'' typically takes the form of monetary harm, such as fees or
costs paid by consumers because of the unfair act or practice. In
addition, actual injury is not required; a significant risk of concrete
harm is sufficient.\22\ An injury is not reasonably avoidable by
consumers when consumers cannot make informed decisions or take action
to avoid that injury. Injury that occurs without a consumer's knowledge
or consent, when consumers cannot reasonably anticipate the injury, or
when there is no way to avoid the injury even if anticipated, is not
reasonably avoidable. Finally, an act or practice is not unfair if the
injury it causes or is likely to cause is outweighed by its consumer or
competitive benefits.
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\21\ Depending on the circumstances, assessing overdraft fees
may also implicate deceptive or abusive acts or practices, or other
unfair acts or practices under CFPA sections 1031, 1036, 12 U.S.C.
5531, 5536.
\22\ See F.T.C. v. Wyndham Worldwide Corp., 799 F.3d 236, 246
(3d Cir. 2015).
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Charging an unanticipated overdraft fee may generally be an unfair
act or practice. Overdraft fees inflict a substantial injury on
consumers. Such fees can be as high as $36; thus consumers suffer a
clear monetary injury when they are charged an unexpected overdraft
fee. Depending on the circumstances of the fee, such as when
intervening transactions settle against the account or how the
financial institution orders the transactions at the end of the banking
day, consumers could be assessed more than one such fee, further
exacerbating the injury. These overdraft fees are particularly harmful
for consumers, as consumers likely cannot reasonably anticipate them
and thus plan for them.
As a general matter, a consumer cannot reasonably avoid
unanticipated overdraft fees, which by definition are assessed on
transactions that a consumer would not reasonably anticipate would give
rise to such fees. There are a variety of reasons consumers might
believe that a transaction would not incur an overdraft fee, because
financial institutions use complex policies to assess overdraft fees
that are likely to be unintelligible to many consumers. These policies
include matters such as the timing gap between authorization and
settlement and the significance of that gap, the amount of time a
credit may take to be posted on an account, the use of one kind of
balance over another for fee calculation purposes, or the order of
transaction processing across different types of credit and debits.
Mobile banking and the widespread use of debit card transactions could
create a consumer expectation that account balances can be closely
monitored. Consumers who make use of these tools may reasonably think
that the balance shown in their mobile banking app, online, by
telephone, or at an ATM, for example, accurately reflects the balance
that they have available to conduct a transaction and, therefore, that
conducting the transaction will not result in being assessed one or
more overdraft fees. But unanticipated overdraft fees are caused by
often convoluted settlement processes of financial institutions that
occur after the consumer enters into the transaction, the intricacies
of which are explained only in fine print, if at all.
Consumers are likely to reasonably expect that a transaction that
is authorized at point of sale with sufficient funds will not later
incur overdraft fees. Consumers may understand their account balance
based on keeping track of their expenditures, or increasingly through
the use of mobile and online banking, where debit card transactions are
immediately reflected in mobile and online banking balances. Consumers
may reasonably assume that when they have sufficient available balance
in their account at the time they entered into the transaction, they
will not incur overdraft fees for that transaction. But consumers
generally cannot reasonably be expected to understand and thereby
conduct their transactions to account for the delay between
authorization and settlement--a delay that is generally not of the
consumers' own making but is the product of payment systems. Nor can
consumers control the methods by which the financial institution will
settle other transactions--both transactions that precede and that
follow the current one--in terms of the balance calculation and
ordering processes that the financial institution uses, or the methods
by which prior deposits will be taken into account for overdraft fee
purposes.\23\
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\23\ While financial institutions must obtain a consumer's
``opt-in'' before the consumer can be charged overdraft fees on one-
time debit card and ATM transactions, 12 CFR 1005.17(b), this does
not mean that the consumer intended to make use of those services in
these transactions where the consumer believed they had sufficient
funds to pay for the transaction without overdrawing their account.
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The injury from unanticipated overdraft fees likely is not
outweighed by countervailing benefits to consumers or competition.
Where a financial institution has authorized a debit card transaction,
the institution is obligated to pay the transaction, irrespective of
whether an overdraft fee is assessed. Access to overdraft programs
therefore is not a countervailing benefit to the
[[Page 66938]]
assessment of overdraft fees in such unanticipated circumstances.
Nor does it seem plausible that the ability to generate revenue
through unanticipated overdraft fees allows for lower front-end account
or maintenance fees that would outweigh the substantial injury in terms
of the total costs of the unanticipated overdraft fees charged to
consumers. Indeed, in recent months, several large banks have announced
plans to entirely eliminate or significantly reduce overdraft fees.\24\
In other consumer finance contexts, research has shown that where back-
end fees decreased, companies did not increase front-end prices in an
equal amount.\25\ But even a corresponding front-end increase in
pricing would generally not outweigh the substantial injury from
unexpected back-end fees.
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\24\ CFPB, ``Comparing overdraft fees and policies across
banks'' (Feb. 10, 2022), available at <a href="https://www.consumerfinance.gov/about-us/blog/comparing-overdraft-fees-and-policies-across-banks/">https://www.consumerfinance.gov/about-us/blog/comparing-overdraft-fees-and-policies-across-banks/</a>.
\25\ Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney, &
Johannes Stroebel, Regulating Consumer Financial Products: Evidence
from Credit Cards, Quarterly Journal of Economics, Vol. 130, Issue 1
(Feb. 2015), pp. 111-64, at p. 5 & 42-43, available at <a href="https://academic.oup.com/qje/article/130/1/111/2338025?login=true">https://academic.oup.com/qje/article/130/1/111/2338025?login=true</a>.
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As for benefits to competition, economic research suggests that
shifting the cost of products from front-end prices to back-end fees
risks harming competition by making it more difficult to compete on
transparent front-end fees and reduces the portion of the overall cost
that is subject to competitive price shopping.\26\ This is especially
the case, where, as here, the fees likely cannot reasonably be
anticipated by consumers. Given that back-end fees are likely to be
harmful to competition, it may be difficult for institutions to
demonstrate countervailing benefits of this practice. A substantial
injury that is not reasonably avoidable and that is not outweighed by
such countervailing benefits would trigger liability under existing
law.
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\26\ Xavier Gabaix & David Laibson, Shrouded Attributes,
Consumer Myopia, and Information Suppression in Competitive Markets,
Quarterly Journal of Economics, Vol. 121, Issue 2 (May 2006), pp.
505-40, available at https://pages.stern.nyu.edu/~xgabaix/papers/
shrouded.pdf; see also Steffen Huck & Brian Wallace, The impact of
price frames on consumer decision making: Experimental evidence
(2015), available athttps://www.ucl.ac.uk/~uctpbwa/papers/price-
framing.pdf; Agarwal et al., Regulating Consumer Financial Products,
supra note 25; Sumit Agarwal, Souphala Chomsisengphet, Neale
Mahoney, & Johannes Stroebel, A Simple Framework for Establishing
Consumer Benefits from Regulating Hidden Fees, Journal of Legal
Studies, Vol. 43, Issue S2 (June 2014), pp. S239-52, available at
<a href="https://nmahoney.people.stanford.edu/sites/g/files/sbiybj23976/files/media/file/mahoney_hidden_fees_jls.pdf">https://nmahoney.people.stanford.edu/sites/g/files/sbiybj23976/files/media/file/mahoney_hidden_fees_jls.pdf</a>.
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Examples of Potential Unfair Acts or Practices Involving Overdraft Fees
That Consumers Would Not Reasonably Anticipate
In light of the complex systems that financial institutions use for
overdraft, such as different balance calculations and transaction
processing orders, enforcers should scrutinize situations likely to
give rise to unanticipated overdraft fees. The following are non-
exhaustive examples of such practices that may warrant scrutiny.
Unanticipated overdraft fees can occur on ``authorize positive,
settle negative'' or APSN transactions, when financial institutions
assess an overdraft fee for a debit card transaction where the consumer
had sufficient available balance in their account to cover the
transaction at the time the consumer initiated the transaction and the
financial institution authorized it, but due to intervening
authorizations, settlement of other transactions (including the
ordering in which transactions are settled), or other complex
processes, the financial institution determined that the consumer's
balance was insufficient at the time of settlement.\27\ These
unanticipated overdraft fees are assessed on consumers who are opted in
to overdraft coverage for one-time debit card and ATM transactions, but
they likely did not expect overdraft fees for these transactions.
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\27\ See, e.g., CFPB Supervisory Highlights, supra note 15;
Interagency Overdraft Services Consumer Compliance Discussion, supra
note Error! Bookmark not defined.; Federal Reserve Board, Consumer
Compliance Supervision Bulletin, supra note Error! Bookmark not
defined.; FDIC, Consumer Compliance Supervisory Highlights, supra
note Error! Bookmark not defined.
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The following table (Table 1) shows an example of unanticipated
overdraft fees involving a debit card transaction with an intervening
debit transaction. The consumer is charged an overdraft fee even though
the consumer's available balance was positive at the time the consumer
entered into the debit card transaction.
Table 1--Unanticipated Overdraft Fee Assessed Through APSN With Intervening Debit Transaction
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Available
Description Transaction balance Ledger balance
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Day 1:
Opening Balance............................................. $100 $100
Debit card transaction--authorized.......................... -$50 50 100
Day 2:
Preauthorized ACH debit--posted............................. -120 -70 -20
Overdraft fee............................................... -34 -104 -54
Day 3:
Debit card transaction--posted.............................. -50 -104 -104
Overdraft fee............................................... -34 -138 -138
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For example, as illustrated above in Table 1, on Day 1, a consumer
has $100 in her account available to spend based on her available
balance displayed. The consumer enters into a debit card transaction
that day for $50. On Day 2, a preauthorized ACH debit that the consumer
had authorized previously for $120 is settled against her account. The
financial institution charges the consumer an overdraft fee. On Day 3,
the debit card transaction from Day 1 settles, but by that point the
consumer's account balance has been reduced by the $120 ACH debit
settling and the $34 overdraft fee, leaving the balance as negative $54
using ledger balance, or negative $104 using available balance. When
the $50 debit card transaction settles against the negative balance,
the financial institution charges the consumer another overdraft fee.
Consumers may not reasonably expect to be charged this second overdraft
fee, based on a debit card transaction that has been authorized with a
sufficient account balance. The consumer may reasonably expect that if
their account balance shows sufficient funds for the transaction just
before entering into the
[[Page 66939]]
transaction, as reflected in their account balance in their mobile
application, online, at an ATM, or by telephone, then that debit card
transaction will not incur an overdraft fee. Consumers may not
reasonably be able to navigate the complexities of the delay between
authorization and settlement of overlapping transactions that are
processed on different timelines and impact the balance for each
transaction. If consumers are presented with a balance that they can
view in real-time, they are reasonable to believe that they can rely on
it, rather than have overdraft fees assessed based on the financial
institution's use of different balances at different times and
intervening processing complexities for fee-decisioning purposes.
Certain financial institution practices can exacerbate the injury
from unanticipated overdraft fees from APSN transactions by assessing
overdraft fees in excess of the number of transactions for which the
account lacked sufficient funds. In these APSN situations, financial
institutions assess overdraft fees at the time of settlement based on
the consumer's available balance reduced by debit holds, rather than
the consumer's ledger balance, leading to consumers being assessed
multiple overdraft fees when they may reasonably have expected only
one.
The following table (Table 2) shows an example of how financial
institutions may process overdraft fees on two transactions. The
consumer is charged an additional overdraft fee when the financial
institution assesses fees based on available balance, because the
financial institution is assessing an overdraft fee on a transaction
which the institution has already used in making a fee decision on
another transaction. By contrast, the consumer would not have been
charged the additional overdraft fee if the financial institution used
ledger balance.
Table 2--Unanticipated Overdraft Fee Assessed Through APSN by Financial Institution Using Available Balance for
Fee Decision
----------------------------------------------------------------------------------------------------------------
Available
Description Transaction balance Ledger balance
----------------------------------------------------------------------------------------------------------------
Day 1:
Opening Balance............................................. .............. $100 $100
Debit card transaction--authorized.......................... -$50 50 100
Day 2:
Preauthorized ACH debit--posted............................. -60 -10 -40
Overdraft fee (assessed based on available balance)......... -34 -44 * 6
Day 3:
Debit card transaction--posted.............................. -50 -44 -44
Overdraft fee............................................... -34 -78 -78
----------------------------------------------------------------------------------------------------------------
* (But if the financial institution had used ledger balance for fee assessment, the balance would not have been
reduced by an overdraft fee.)
For example, as illustrated above in Table 2, on Day 1, a consumer
has $100 in her account, which is the amount displayed on her online
account. The consumer enters into a debit card transaction that day for
$50. On Day 2, a preauthorized ACH debit that the consumer had
authorized previously for $60 is settled against her account. Because
the debit card transaction from Day 1 has not yet settled, the
consumer's ledger balance, prior to posting of the $60 ACH debit, is
still $100. But some financial institutions will consider the
consumer's balance for purposes of an overdraft fee decision as $50, as
already having been reduced by the not-yet-settled debit card
transaction from Day 1, and thus the settlement of the $60 ACH debit
will take the account negative and incur an overdraft fee. On Day 3,
the debit card transaction from Day 1 settles, but by that point the
consumer's balance has been reduced by the settlement of the $60 ACH
debit plus the overdraft fee for that transaction. If the overdraft fee
is $34, the consumer's account has $6 left in ledger balance. The $50
debit card transaction then settles, overdrawing the account and the
financial institution charges the consumer an overdraft fee. The
consumer would not expect two overdraft fees, since her account balance
showed sufficient funds at the time she entered into the debit card
transaction to cover either one of them. But in this example, the
financial institution charged two overdraft fees, by assessing an
overdraft fee on a transaction which the institution has already used
in making a fee decision on another transaction. By contrast, a
financial institution using ledger balance for the overdraft fee
decision would have charged only one overdraft fee.
About Consumer Financial Protection Circulars
Consumer Financial Protection Circulars are issued to all parties
with authority to enforce Federal consumer financial law. The CFPB is
the principal Federal regulator responsible for administering Federal
consumer financial law, see 12 U.S.C. 5511, including the Consumer
Financial Protection Act's prohibition on unfair, deceptive, and
abusive acts or practices, 12 U.S.C. 5536(a)(1)(B), and 18 other
``enumerated consumer laws,'' 12 U.S.C. 5481(12). However, these laws
are also enforced by State attorneys general and State regulators, 12
U.S.C. 5552, and prudential regulators including the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, and the National
Credit Union Administration. See, e.g., 12 U.S.C. 5516(d), 5581(c)(2)
(exclusive enforcement authority for banks and credit unions with $10
billion or less in assets). Some Federal consumer financial laws are
also enforceable by other Federal agencies, including the Department of
Justice and the Federal Trade Commission, the Farm Credit
Administration, the Department of Transportation, and the Department of
Agriculture. In addition, some of these laws provide for private
enforcement.
Consumer Financial Protection Circulars are intended to promote
consistency in approach across the various enforcement agencies and
parties, pursuant to the CFPB's statutory objective to ensure Federal
consumer financial law is enforced consistently. 12 U.S.C. 5511(b)(4).
Consumer Financial Protection Circulars are also intended to
provide transparency to partner agencies regarding the CFPB's intended
approach when cooperating in enforcement actions. See, e.g., 12 U.S.C.
5552(b) (consultation with CFPB by State attorneys general and
regulators); 12
[[Page 66940]]
U.S.C. 5562(a) (joint investigatory work between CFPB and other
agencies).
Consumer Financial Protection Circulars are general statements of
policy under the Administrative Procedure Act. 5 U.S.C. 553(b). They
provide background information about applicable law, articulate
considerations relevant to the Bureau's exercise of its authorities,
and, in the interest of maintaining consistency, advise other parties
with authority to enforce Federal consumer financial law. They do not
restrict the Bureau's exercise of its authorities, impose any legal
requirements on external parties, or create or confer any rights on
external parties that could be enforceable in any administrative or
civil proceeding. The CFPB Director is instructing CFPB staff as
described herein, and the CFPB will then make final decisions on
individual matters based on an assessment of the factual record,
applicable law, and factors relevant to prosecutorial discretion.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2022-23982 Filed 11-4-22; 8:45 am]
BILLING CODE 4810-AM-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.